WOW! Donot - Do you know about First Bank of Oak Park and Park National - didnt they have a condo development on Michigan Avenue that failed because of the GSE Preferred Stock?
Remember what Dr. Susan Wachter said at the end of her FCIC interview - the USG was pressuring investors to buy subprime. At the same time they were marketing JPS while they were discussing the benefits of nationalization.
Here are some excerpts from the Kelly Complaint:
41. On March 10, 2008, Barron’s published a critical article about Fannie Mae that
suggested the company was insolvent. The article was sourced by the White House with full
knowledge of the Treasury. As detailed by the Financial Crisis Inquiry Commission (“FCIC”), in
advance of the article, a member of the Bush administration sent the Undersecretary to the Treasury
(via email) a report identified as the source for the Barron’s article, stating that the report should
be used to “help inform potential internal Treasury discussions about the potential costs and
benefits of nationalization.”
42. On March 19, 2008, OFHEO (at Treasury’s behest) eased capital restraints on the
GSEs in exchange for the agreement of the GSEs to raise significant capital at some undetermined
point in the future. This change exacerbated the accumulation of high-risk holdings by the GSEs.
Requiring the GSEs to take such risky steps reveals, in hindsight, that the Government was laying
the groundwork to impose a conservatorship apart from whether conservatorship could be lawfully
Case 1:21-cv-01949-KCD Document 1 Filed 10/01/21 Page 17 of 45
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imposed under HERA. As detailed by author Timothy Howard in The Mortgage Wars, the former
CFO of Fannie Mae later stated that Treasury Secretary Henry Paulson’s “action to not just allow
but actually encourage Fannie Mae and Freddie Mac to add new mortgages with no firm
commitment to raise capital to back them is understandable only if by then he had concluded that
Treasury would be able to use the road map from the GSE insolvency paper . . . to put the GSEs
into receivership or conservatorship.”
43. Although not publicly revealed until 2011, throughout the summer of 2008, the
Government continued to destabilize the GSEs through press leaks and leaks to Wall Street
executives and hedge fund managers that GSE conservatorship was imminent. This included a
meeting between Secretary Paulson and Wall Street executives before the passage of HERA in
which Secretary Paulson revealed that the GSEs would be placed into conservatorship. Barron’s
published a second article based on information from White House sources predicted an imminent
takeover of the GSEs on August 18, 2008. As discussed below, the Government takeover did not
occur immediately as Secretary Paulson tried to suggest in the leaks. Furthermore, there were no
statutory grounds to impose a conservatorship. But these leaks, as the Government intended,
caused GSE share price to drop significantly. This is classic governmental conduct preceding a
governmental nationalization or massive expropriation.
44. Throughout this period, Government officials and regulators made repeated public
statements, in contrast to what hedge funds were told in private, emphasizing the sound financial
status of the GSEs. On March 31, 2008, for example, the Director of OFHEO classified the GSEs
as adequately capitalized. On July 10, 2008, Secretary Paulson and Chairman of the Federal
Reserve Ben Bernanke testified before the House of Representatives that both GSEs were
adequately capitalized, and the Director of the OFHEO issued a news release stating the same.
Case 1:21-cv-01949-KCD Document 1 Filed 10/01/21 Page 18 of 45
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Secretary Paulson specifically emphasized that there was no sudden deterioration in conditions at
the GSEs that motivated their support for HERA.
45. On July 24, 2008, with Treasury’s support, HERA was enacted. HERA established
the Federal Housing Finance Authority to regulate and supervise the GSEs. HERA gave the FHFA
greater regulatory authority than the OFHEO held under the 1992 Act.
46. Despite the government incentives discussed above, encouraging investors such as
the FBOP Subsidiaries and River Capital to purchase GSE preferred shares, proposed protection
for individual shareholders who had been holding preferred stock in Fannie Mae and Freddie Mac
did not pass Congress. Congressman Barney Frank, then chairman of the House Financial Services
Committee, stated that the treatment of preferred stocks in Fannie Mae and Freddie Mac arose
during the negotiations of the 2008 Act. Concern focused on community banks and individual
investors who had purchased preferred shares and would be affected by the legislation. In a letter
to constituents on the financial crisis dated October 11, 2008, Congressman Frank explained his
proposal: “At my urging, in order to ensure that community banks and other institutions holding
the preferred stock of Fannie Mae and Freddie Mac receive some protection, the bill allows losses
from such preferred stock to be treated as ordinary loss for tax purposes.” Congressman Frank
also explained why his proposal did not become law: “While I fought also
AI
